1. Trying to make an unfair world a little bit more fair…..

2.  Remember the big 3 economic questions?

3.   So what decides who receives the majority of income and output in a market economy? What are the determining factors? For whom to produce?

4.  Selling those factors of production

5.   As we all know, there is a huge disparity among owners of the factors of production. Some people have special talents and are highly educated, some people do not. Many critics of the market economy use this as an argument against it…. Market economy reality

6.  So what if anything is government to do?

7.   Government typically chooses from among four policies to try and correct the issue of income redistribution. Can we name them……? The Big 4

8.   The distribution of income from the haves to the have nots (vulnerable groups). Let’s all shout out without raising our hands some examples of recipients of transfer payments and types of transfer payments…. #1--Transfer Payments

9.  Transfers Recipients  Old folks  Sick folks  Poor folks  Kids of poor folks  Unemployed folks Examples  Pensions  Unemployment benefits  Housing benefits  Child allowances  Maternity benefits and more….

10.  Accepting the reality of unequal income distribution, it would not be surprising to see many of the less fortunate in society unable to receive the benefits of certain merit goods. Merit goods are goods that…….. #2—Subsidized provision of merit goods

11.   Merit goods have spillover benefits but often can’t be purchased by poor people.  Considered basic human rights nowadays, with unequal distribution of income, too many people would not receive these goods, thus causing significant problems for society as a whole. Merit Goods

12.   Government must make sure not only to provide education and healthcare but to make them affordable too. Some governments provide free universal healthcare and education, while others have not gone as far…..perhaps they should… Government’s role

13.   Thank-you government for:  Clean Water  Sanitation  Sewerage Other subsidized merit goods

14.   Subsidize merit goods to ensure that the quantity provided increases Government’s role

15.   Government will often intervene in markets to benefit certain groups. Examples include:  Minimum wage legislation  Price supports for farmers  Subsidies to firms #3—Government intervention in markets

16.  #4--Taxation

17.   Tax revenue allows for the provision of transfer payments and the subsiding of merit goods. Tax policies on their own also allow for redistribution of income, but decisions must be made…. Taxation

18.   Yet they allow government to do many important things, such as:  Provide public transport  Provide transfer payments/merit goods  Correct negative externalities  Pursue fiscal policy when needed  And many, many more… Everybody hates taxes!

19.  Two types of taxes

20.   These taxes are paid directly by the consumer to the government. Examples include:  Personal income tax  Corporate income tax  Wealth tax (on property, inheritances)  Earmarked taxes (to support programs like unemployment insurance, social security and healthcare) Direct taxes

21.   These taxes are usually placed on the supplier or seller of a good/service, but the consumer will have to incur some incidence of this tax. There are three main categories we will discuss…… Indirect Taxes

22.   These are taxes on various goods and services paid at the time of purchase.  In the U.S.A., many states put a fixed percentage tax on goods purchased.  Other countries use a value added tax, which taxes each stage of the production process for the value that is added. General Expenditure Taxes (Sales taxes)

23.   These are taxes placed on goods that the government wants to discourage consumption of. The level of incidence of the tax for the consumer depends on the elasticity of demand of the consumer for the particular product. Excise taxes (Sin taxes)

24.   These are taxes placed on imported goods. They serve the purpose of protecting domestic industries and at the same time raising revenues. They tend to be much less a part of government policy in MDCs than they are in LDCs Tariffs (Customs duties)

25.   Most human beings with a heart can come to terms with the idea that the more income you earn the more you should contribute in taxes.  Unfortunately, the question is more complicated than should the wealth pay more, but how much more should they pay? The ability to pay principle

26.  Tax Flavours

27.   Taxes are usually defined as being either:  Proportional  Progressive  Regressive  This depends on the relationship between income and the fraction of income paid as tax…sound confusing? It’s not really…. Tax Flavours

28.   As income increases, the fraction of income paid as taxes remains constant.  Joe makes $10,000 a year and his tax rate is 15%. Warren makes $10,000,000,000,000 a year, and his tax rate is 15%.  Warren obviously pays more in taxes, but the tax rate is the same. Seem fair? Proportional Tax

29.   As income increases, the fraction of income paid as taxes remains increases.  Joe makes $10,000 a year and his tax rate is 15%. Joel makes $20,000 a year, and his tax rate is 20%.  Joel earns more therefore pays more in taxes. This is a mildly progressive tax, a strongly progressive tax would be higher for Joel. Seem fair? Proportional Tax

30.   As income increases, the fraction of income paid as taxes decreases.  Joe makes $10,000 a year and his tax rate is 15%. Bill makes $20,000 a year and his rate is 10%.  Bill still pays a larger dollar amount in this example than Joe, but his % is lower. Seem fair? Regressive tax

31.   The more progressive a tax system is, the more equal the after-tax distribution of income will be compared to the pre-tax distribution of income.  However, this alone does not remove the controversy surrounding the tax issue General Conclusion

32.   As you can probably guess, people with high incomes are not happy to see a highly progressive tax system.  They argue that they worked hard to achieve what they have, and shouldn’t be forced to pay a higher rate to support the lower income classes.  Is this a fair point? Controversy over taxes

33.   Do high taxes reduce the incentives of the rich to work and save? Additional questions to ponder

34.   Do taxes worsen the allocation of resources (create allocative efficiency) ?  Do high taxes encourage tax evasion? Additional questions to ponder

35.   Is there a trade-off between income equality and efficiency?  If we create more income equality, will economic growth be sacrificed? Additional questions to ponder

36.   Might there be a conflict between using taxes as a fiscal policy tool and as an income redistribution tool?  Do transfer payments reduce the incentives of the poor to work and save? Additional questions to ponder